High debt levels the real problem facing banks
Concerns about the world economy have risen to the top of the list of risks bankers face, according to the latest Banking Banana Skins report.Other issues causing concern are criminality, regulation, technology risk, political interference, quality of risk management, credit risk, conduct practices, pricing of risk and business models.Banana Skins is an annual survey of bankers worldwide, produced by the Centre for the Study of Financial Innovation in New York in association with PwC. Thirteen Australian bankers were among the 672 respondents.According to the report, in the opinion of respondents "the greatest threat to the banking industry lies in the possibility that economic recovery will fail because of the huge, and in many cases rising, weight of debt in all the main sectors - sovereign, corporate and consumer."Respondents were also concerned about economic weakness in developing countries and uncertainty surrounding central banks' monetary policies.Many bankers have a view that growth is only occurring because of conditions created by artificially low interest rates and could easily fail. Higher indebtedness brings greater financial fragility, making banks vulnerable in the face of economic shocks. Concern about the economy rose to the top spot in the survey from number three last year.Criminality rose from number nine last year to number two in the latest survey. CSFI said growing concern in this area was due to the increase in cross-border cyber crime.Bankers said they were concerned they would be faced with cyber attacks that they could not manage.The related concern about technology risk (ranked fourth) reflected a view that banks have not invested enough in their capacity to deal with these threats.Two concerns that have eased over the past year are regulation (down from one to three) and political interference (down from two to five).The downgrading in the level of concern about regulation reflects a greater acceptance of the need for tougher banking controls, as well as a growing recognition that some of the changes have been beneficial - making banks stronger and more "risk aware".However, there was still plenty of concern that post-GFC regulation was excessive and costly, was stifling innovation and diversity, and encouraged "herding" (an industry-wide shift to portfolios that have optimal regulatory profiles).The lower level of concern about political interference reflected a view that post-GFC bank bashing by politicians and others was abating.An emerging risk was social media (up from 19 to 11), which bankers believe has the power to damage brands even when there is no evidence to support claims. Some respondents said there was a strong anti-bank bias in social media commentary.CSFI said one surprising result was that concern about capital availability was ranked tenth - down from number four in 2012. Banks have a number of regulatory changes ahead of them that will require additional capital but many of them said there was plenty of capital available.CFSI questioned this attitude, saying that at some point investors would recognise that they were likely to get lower returns on the capital they were putting into banks and might turn off